RBI & Fed: CRR hike, 25 bps cut in prospect

S. Balakrishnan

Tuesday, 30 October , 2007, 08:54

The stock market continues to hog the headlines. After dropping a couple of thousand points in the aftermath of the Securities and Exchange Board of India's moves on participatory notes, the market roared back to beat its old highs and, at the time of writing, is just a whisker below 20,000. What's going on? It turned out that there was really going to be no restriction on foreign flows into the stock market, only full disclosure of antecedents, that too waivable in certain cases. When this sank in, investors, domestic and offshore, rode right back. The market barely took notice of the Finance Minister's statement, early Friday, that ways and means must be found to check untrammelled capital movement into the financial system. Spotlight on RBI The spotlight now turns on the Reserve Bank of India as it gets ready to announce its half-yearly Monetary Policy the equivalent, one might say, of the Federal Open Market Committee (FOMC) meeting to decide on US interest rates. Having achieved a measure of success in controlling inflation, it is unwanted forex riches pushing up the rupee that is the central bank's main worry now. The dollar flood is correlated not so much to the much-talked about stellar performance and prospects of the economy, but phenomenal short-term asset inflation in red-hot stock and property markets, making India a sure bet for global investors. The central bank has been and is gamely intervening to support the dollar, injecting, in the process, more liquidity into the system. But absorbing this is hardly costless. MSS bonds are not only a drain on the fisc but also eligible collateral, so they do not permanently remove liquidity. Only option Reluctant though it might be, the RBI's only option is to increase the CRR, accompanied (perhaps) by a reduction in the repo rate, as a signal to banks to lower their lending rates. A surprise brake on capital flows, given the Finance Minister's concern, cannot be ruled out. Also watched will be the interest rate decision of the FOMC. Financial market conditions have improved since the last meeting. But losses from CDO portfolios are still emerging from the woodworks, the latest being Merrill Lynch's write-offs. Data suggest a weak economy, but not in recession. Inflation, by the Fed's chosen measures, is benign. The FOMC is likely to conclude that a 25 bps cut contains little risk. Europe, Japan and the UK are slowing. Deflation continues to bug Japan. There seems little chance of their central banks switching out of their current defensive mode in the short-term. In anticipation, two-year bond European bond yields have dropped below 4 per cent, while Britain's is below 4 per cent - in both cases above their central bank rates. Booming stock markets, record oil prices, falling bond yields. The contradictions could not be starker.

Indian markets among top wealth creators

Kumar Shankar Roy

Tuesday, 30 October , 2007, 08:34zx

This might come as an eye-opener for people who choose to downplay Sensex's scintillating run as a "pure numbers game." Indian equity markets have been one of the top performing markets when it comes to wealth creation, witnessing an 89 per cent expansion in the total market capitalisation in 2007. Wealth creation This compares to a Sensex return of 63 per cent on a year-to-date basis. Though markets such as China (whopping 215 per cent gain) are ahead of India in wealth creation, India (89 per cent) scores higher than markets such as Brazil (86 per cent), Thailand (51 per cent) and South Korea (49 per cent) in terms of expansion in market cap this year. Overall, the total market cap for Indian stocks accounts for 2.5 per cent of the world market cap share - at over $1,540 billion (Rs 61 lakh crore) at current market levels. The total market capitalisation has grown 2.2 times from Rs 25,56,700 crore at the beginning of 2007. While emerging markets have posted strong performances, the developed economies have lagged in wealth creation this year. The market capitalisation of the UK and the US have grown by a measly 7 and 9 per cent, respectively, this year while Japan has seen its total investor wealth drop by three per cent. Index returns too have been higher for emerging markets as compared to the developed ones.

Oil eases as investors take profits from new peaks

Tue Oct 30, 2007 1:55am EDT

By Jiwon Chung

SINGAPORE (Reuters) - Oil prices fell nearly 1 percent to below $93 a barrel on Tuesday, fading from their latest record high as investors took profits from a rally driven by a Mexican supply outage and the spiralling dollar.

U.S. crude fell by 71 cents to $92.82 a barrel by 1:43 a.m. EDT after hitting a record high of $93.80 in the previous session. London Brent lost 59 cents to $89.73, down nearly $1 from its record high.

"Investors are reluctant to buy oil at high prices and they are trying to take profits at the moment," said Tetsu Emori, fund manager at Japan's Astmax Futures Co Ltd.

"But the market is still strong -- the trouble in Mexico is very supportive and the weak dollar also provides room for oil prices to go up."

State oil company Pemex has shut a fifth of Mexico's crude production and halted the bulk of exports, as storms kept ships bottled at ports across the country. It hopes to resume supplies when bad weather eases in a day or so.

The U.S. dollar hovered near record lows versus the euro and major currencies on Tuesday, ahead of an expected interest rate cut when the U.S. Federal Reserve's Federal Open Market Committee meets on October 30-31.

Lower interest rates in the wake of the U.S. subprime debacle helped fuel an influx of investor capital into commodities, pushing oil toward its inflation-adjusted, all-time peak of $101.70 a barrel in April 1980.

Despite widespread expectations of cheaper money, the Wall Street Journal reported on Tuesday that a rate cut was not a sure thing, causing the dollar to firm slightly.

Oil cartel OPEC has shrugged off calls from importer nations to cool prices by raising crude output, blaming politics and speculation -- not a supply shortfall -- for $90-plus oil.

On Wednesday traders will shift focus to weekly U.S. inventory data expected to show crude stocks rose 600,000 barrels in the week to October 26, helping buffer stocks after last week's sharp decline, which kicked off an $8 rise over four days.

Distillate stocks were seen falling by 1.1 million barrels and gasoline stocks down by 300,000 barrels.

India , China need to keep opening up: US
Agencies
Posted online: Monday , October 29, 2007 at 1531 hrs

Mumbai, October 29:US Treasury Secretary Henry Paulson on Monday urged India to accelerate reforms to open up its economy and said China needed to move more quickly towards a market-determined currency.

Paulson said India was mostly on the right path to modernise its financial sector, with a flexible currency, but China, with its tightly controlled yuan exchange rate, was increasingly the focus of protectionist sentiment around the world.

"Very often around the world, if someone doesn't like globalization, the face they put on it is the face of China," the US treasury secretary told an infrastructure conference in India's burgeoning financial capital.

Paulson said China needed to allow the yuan to rise more in the near term to reflect the strong fundamentals of an economy that data last week showed expanded in the third quarter by 11.5 percent over a year earlier.

China runs a large trade surplus with the United States, prompting some US policy makers to demand that Beijing allow its currency to rise faster to curb the pace of its exports.

Currency dealers on Monday said China could well be preparing the foreign exchange market for faster yuan appreciation after the currency jumped more than 0.3 percent against the dollar for its biggest daily gain since it was revalued in 2005.

India has averaged economic growth of 8.6 percent over the past four years.

Paulson, in the midst of a trip that also includes Kolkata and New Delhi, lauded India for allowing the rupee to appreciate but warned that limiting capital flows would hurt the country's competitiveness.

Last week, India announced restrictions on anonymous foreign investment into shares, which has sent the stock market to record highs and put upward pressure on the rupee.

Restrictions on capital flows were 'blunt instruments' that could have unintended consequences, Paulson said.

"I urge my Indian colleagues to continue, and accelerate, their efforts to liberalize the economy and develop the financial system -- to assure that the vibrancy and growth that the Indian economy now enjoys continues well into the future," Paulson told the conference.

CURBS

Speaking at the conference, Finance Minister Palaniappan Chidambaram said India introduced the curbs because of concern about investment from unregistered entities, especially unregulated ones.

"So long as funds come in after registrations, they are welcome to do so," Chidambaram said.

Paulson, in a later session with Indian journalists, said the key to success for the new rules on inflows was that they be implemented in a manner that was transparent and flexible.

One way for India to reduce the pressure from inflows would be to reduce restrictions on investment outflows, he added.

Paulson also said limits on debt and equity financing and asset allocation restrictions on financial institutions were impediments to putting resources to their most productive use.

He understood Indian officials were concerned that as Mumbai gained strength as a major financial centre, increased capital flows could increase inflationary pressures, destabilize domestic financial markets or add to exchange rate volatility.

"For the most part, India is on the right path to reduce these risks. India has allowed greater flexibility in the exchange rate in recent months, and the appreciation in the rupee has helped to reduce inflationary pressures," Paulson said.

LONG-TERM FUNDS

India could take a number of steps to become more competitive in the long term, such as reducing requirements that financial institutions hold large amounts of government debt, reducing the need for banks to provide credit to priority sectors, and removing various restrictions and caps on foreign investment.

Paulson said Wall Street stood ready to help India build Mumbai into a major capital market centre, particularly in the development of a domestic bond market that would provide long-term financing for much-needed infrastructure development.

He said the United States supported India's ambitious plans to attract public-private partnerships to help finance its infrastructure needs, but said this would require transparent and independent regulatory frameworks, where government entities do not act as both regulator and services providers.

"Investors, especially those who must make long-term commitments as in most infrastructure projects, want certainty in their operating environments," Paulson said.

RBI hikes CRR to 7.5%, other rates steady
Agencies
Posted online: Tuesday , October 30, 2007 at 1140 hrs

Mumbai, October 30:Belying expectations of any relief on interest rate front, Reserve Bank on Tuesday hiked the statutory deposits - CRR - by 0.5 per cent to 7.5 per cent despite inflation falling to a five-year low.

Cash Reserve Ratio is the ratio of interest-free cash reserves mandatorily kept by the banks with the RBI, which had it been unchanged could have provided banks an option to ease the lending rates.

It, however, left the key lending and borrowing rates (repo, reverse repo) and bank rates unchanged.

Unveiling the busy season monetary policy, RBI Governor Y V Reddy sent strong signals that the apex bank's hawkish stance would continue in order to ensure price stability, credit quality and orderly conditions in the financial market. Inflation has now come down to 3.07 per cent.